Trade and Resources:

The Heckscher–Ohlin Model

Chapter 4

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International Economics, 5e | Feenstra/Taylor 1
Questions to Consider

1. Why does the United States export agricultural

products and airplanes?
2. What country has the most capital (i.e.,
factories) as compared with its GDP?
3. How does trade affect the earnings of labor and
capital?

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Introduction (part 1)

• In this chapter, we outline the Heckscher–Ohlin (HO)

model, a model that assumes that trade occurs because
countries have different resources.
• Canada has a large amount of land and therefore exports
agricultural and forestry products, as well as petroleum.
• The United States, Western Europe, and Japan have many
highly skilled workers and much capital, and these countries
export sophisticated services and manufactured goods.
• Asian countries have a large number of workers and
moderate but growing amounts of capital, and they export
less sophisticated manufactured goods.

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Introduction (part 2)

• Our first goal is to describe the Heckscher–

Ohlin (HO) model of trade.
– The specific-factors model that we studied in the
previous chapter was a short-run model
because capital and land could not move
between the two industries.
– In contrast, the HO model is a long-run model
because all factors of production can move
between the industries.

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Introduction (part 3)

• Our second goal is to examine the empirical evidence on the

Heckscher–Ohlin model. To obtain better predictions, we
extend the model:
• By allowing for more than two factors of production
• By also allowing countries to differ in their technologies, as in
the Ricardian model
• Both of these extensions make the predictions from the
Heckscher–Ohlin model match more closely the trade
patterns in the world economy today.
• The third goal of the chapter is to investigate how the
opening of trade between two countries affects the payments
to labor and to capital in each of them.

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1) Heckscher–Ohlin Model (part 1)

• Assumptions of the Heckscher–Ohlin Model

Assumption 1: Both factors, labor and capital, can move freely between
the industries.
Assumption 2: Shoe production is labor-intensive; that is, it requires
more labor per unit of capital to produce shoes than computers, so LS/KS >
LC/KC .
FIGURE 4-1
Labor Intensity of Each Industry
Shoe production being more labor-
intensive than computers implies:
LS/KS > LC/KC
These two curves slope down just like
regular demand curves, but in this case,
they are relative demand curves for labor.

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1) Heckscher–Ohlin Model (part 2)

• Assumptions of the Heckscher–Ohlin Model

• Assumption 3: Foreign is labor-abundant, by which we mean that the
labor–capital ratio in Foreign exceeds that in Home,

• 𝐿!∗ /𝐾
# ∗ > 𝐿! /𝐾
#

• Equivalently, Home is capital-abundant, so that # 𝐿! > 𝐾

𝐾/ # ∗ /𝐿!∗ .
• Assumption 4: The final outputs, shoes and computers, can be traded freely
(i.e., without any restrictions) between nations, but labor and capital do not
move between countries.
• Assumption 5: The technologies used to produce the two goods are identical
across the countries.
• Assumption 6: Consumer tastes are the same across countries, and
preferences for computers and shoes do not vary with a country’s level of
income.
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APPLICATION: Are Factor Intensities the
Same Across Countries?

• While much of the footwear in the

world is produced in developing
nations, the United States retains a
small number of shoe factories.

• In India, the sewing machine used to produce footwear is cheaper

than the computer used in a call center. Footwear production in India
is labor-intensive as compared with the call center, which is the
opposite of what holds in the United States.
• This example illustrates a reversal of factor intensities between
the two countries.
• In the United States, agriculture is capital-intensive. In many
developing countries, it is labor-intensive.

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1) Heckscher–Ohlin Model (part 3)

• No-Trade Equilibrium
• Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
FIGURE 4-2 (1 of 3) No-Trade Equilibria in Home and Foreign

The Home production possibilities frontier Because Home is capital-abundant and

(PPF) is shown in panel (a), and the computers are capital-intensive, the Home
Foreign PPF is shown in panel (b). PPF is skewed toward computers.

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1) Heckscher–Ohlin Model (part 4)

• No-Trade Equilibrium
• Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
FIGURE 4-2 (2 of 3) No-Trade Equilibria in Home and Foreign

Home preferences are summarized by The Home no-trade (or autarky) equilibrium
the indifference curve, U. is at point A.
The flat slope indicates a low relative price
of computers, (PC/PS)A.
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1) Heckscher–Ohlin Model (part 5)

• No-Trade Equilibrium
• Production Possibilities Frontiers, Indifference Curves, and
No-Trade Equilibrium Price
FIGURE 4-2 (3 of 3) No-Trade Equilibria in Home and Foreign

Foreign is labor-abundant and shoes are labor- The Foreign no-trade equilibrium is at point A*,
intensive, so the Foreign PPF is skewed toward with a higher relative price of computers, as
shoes. Foreign preferences are summarized by indicated by the steeper slope of (P*C/P*S)A*.
the indifference curve, U*.

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1) Heckscher–Ohlin Model (part 6)

• No-Trade Equilibrium
• Home Equilibrium with Free Trade

FIGURE 4-3 (1 of 2) International Free-Trade Equilibrium in Home

At the free-trade world relative price of computers, The “trade triangle” has a base equal to the Home
(PC/PS)W, Home produces at point B in panel (a) exports of computers (the difference between the
and consumes at point C, exporting computers amount produced and the amount consumed with
and importing shoes. Point A is the no-trade trade, QC2 − QC3).
equilibrium.
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1) Heckscher–Ohlin Model (part 7)

• No-Trade Equilibrium
• Home Equilibrium with Free Trade

FIGURE 4-3 (2 of 2) International Free-Trade Equilibrium in Home

The height of this triangle is the Home imports of In panel (b), we show Home exports of computers
shoes (the difference between the amount equal to zero at the no-trade relative price,
consumed of shoes and the amount produced (PC/PS)A, and equal to (QC2 − QC3) at the free-
with trade, QS3 − QS2). trade relative price, (PC/PS)W.

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1) Heckscher–Ohlin Model (part 8)

• No-Trade Equilibrium
• Foreign Equilibrium with Free Trade

FIGURE 4-4 (1 of 2) International Free-Trade Equilibrium in Foreign

At the free-trade world relative price of computers, The “trade triangle” has a base equal to Foreign
(PC/PS)W, Foreign produces at point B* in panel imports of computers (the difference between the
(a) and consumes at point C*, importing consumption of computers and the amount
computers and exporting shoes. Point A* is the produced with trade, Q*C3 − Q*C2).
no-trade equilibrium.
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1) Heckscher–Ohlin Model (part 9)

• No-Trade Equilibrium
• Foreign Equilibrium with Free Trade

FIGURE 4-4 (2 of 2) International Free-Trade Equilibrium in Foreign

The height of this triangle is Foreign exports of In panel (b), we show Foreign imports of
shoes (the difference between the production of computers equal to zero at the no-trade relative
shoes and the amount consumed with trade, price, (P*C/P*S)A*, and equal to (Q*C3 − Q*C2) at
Q*S2 – Q*S3). the free-trade relative price, (PC /PS)W.

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1) Heckscher–Ohlin Model (part 10)

• Free Trade Equilibrium

• Equilibrium Price with Free Trade

FIGURE 4-5 Determination of the Free-Trade World Equilibrium Price

The world relative price of computers

in the free-trade equilibrium is
determined at the intersection of the
Home export supply and Foreign
import demand, at point D.
At this relative price, the quantity of
computers that Home wants to
export, (QC2 − QC3), just equals the
quantity of computers that Foreign
wants to import, (Q*C3 − Q*C2).

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1) Heckscher–Ohlin Model (part 11)

• Free Trade Equilibrium

• Pattern of Trade
– Home exports computers, the good that uses
intensively the factor of production (capital)
found in abundance at Home.
– Foreign exports shoes, the good that uses
intensively the factor of production (labor) found
in abundance there.
– This important result is called the Heckscher–
Ohlin theorem.

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1) Heckscher–Ohlin Model (part 12)

• Heckscher–Ohlin Theorem
– Assumption 1: Labor and capital flow freely between the
industries.
– Assumption 2: The production of shoes is labor-
intensive as compared with computer production, which
is capital-intensive.
– Assumption 3: The amounts of labor and capital found
in the two countries differ, with labor abundant in Foreign
and capital abundant in Home.
– Assumption 4: There is free international trade in goods.
– Assumption 5: The technologies for producing shoes
and computers are the same across countries.
– Assumption 6: Tastes are the same across countries.

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1) Heckscher–Ohlin Model (part 13)

• Heckscher–Ohlin Theorem
• Conclusions from Assumptions:
– When Home opens to trade, its relative price of
computers rises from the no-trade equilibrium relative
price (PC/PS)A to the free-trade equilibrium price
(PC /PS)W, giving Home firms an incentive to export
computers.
– Similarly, when Foreign opens to trade, its relative price
of computers falls from the no-trade equilibrium price
(P*C/P*S)A* to the trade equilibrium price
(PC /PS)W , encouraging Foreign consumers to import
computers from Home.

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2) Testing the Heckscher–Ohlin Model
(part 1)
• The first test of the Heckscher–Ohlin theorem was performed by economist
Wassily Leontief in 1953 using data for the United States from 1947.
• Leontief supposed correctly that in 1947 the United States was abundant in
capital relative to the rest of the world.
o Leontief assumed that U.S. and foreign technologies were the same due to
the limited data on foreign technology, which is consistent with H–O theorem.
• Thus, from the Heckscher–Ohlin theorem, Leontief expected that the
United States would export capital-intensive goods and import labor-
intensive goods.
• What Leontief actually found, however, was just the opposite: the capital–
labor ratio for U.S. imports was higher than the capital–labor ratio found for
U.S. exports.
• This finding contradicted the Heckscher–Ohlin theorem and came to be
called Leontief’s paradox.

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2) Testing the Heckscher–Ohlin Model
(part 2)
TABLE 4-1 Leontief’s Test
Leontief used the numbers in this table to test the Heckscher–Ohlin
theorem. Each column shows the amount of capital or labor needed to
produce $1 million worth of exports from, or imports into, the United
States in 1947. As shown in the last row, the capital–labor ratio for
exports was less than the capital–labor ratio for imports, which is a
paradoxical finding.

Exports Imports
Capital ($ millions) 2.55 3.1
Labor (person-years) 182 170
Capital/labor 14,000 18,200
($/person)

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2) Testing the Heckscher–Ohlin Model
(part 3)
• Leontief’s Paradox
• Explanations
– U.S. and foreign technologies are not the same, in contrast to what the
H–O theorem and Leontief assumed.
– By focusing only on labor and capital, Leontief ignored land
abundance in the United States.
– Leontief should have distinguished between high-skilled and low-
skilled labor (because it would not be surprising to find that U.S.
exports are intensive in high-skilled labor).
– The data for 1947 may be unusual because World War II had ended
just two years earlier, and so trade patterns may have been unusual.
– Because of import tariffs between countries, the United States was not
engaged in completely free trade, as the Heckscher–Ohlin theorem
assumes.

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2) Testing the Heckascher–Ohlin Model
(part 4)

• Factor Endowments in 2017

• To determine whether a country is abundant in a
certain factor, we compare the country’s share of
that factor with its share of world GDP.
• If its share of a factor exceeds its share of world
GDP, then we conclude that the country is
abundant in that factor.
• If its share in a certain factor is less than its share
of world GDP, then we conclude that the country is
scarce in that factor.

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2) Testing the Heckscher–Ohlin Model
(part 5)

• Factor Endowments in 2017

FIGURE 4-6 (1 of 2) Country Factor Endowments, 2017
• Shown here are country shares of six
factors of production in the year 2017, for
eight countries and the rest of the world.
We see that 11.8% of the world’s
physical capital was located in the United
States, with 20.5% located in China and
4.4% located in Japan. In the final bar
graph, we see the United States had
16.0% of world GDP, China had 16.2%,
Japan had 4.5%, and so on.
• When a country’s factor share is larger
than its share of GDP, then the country is
abundant in that factor, and when a
country’s factor share is less than its
share of GDP, then the country is scarce
in that factor.
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2) Testing the Heckscher–Ohlin Model
(part 6)

• Factor Endowments in 2017

FIGURE 4-6 (2 of 2) Country Factor Endowments, 2017
• The United States is scarce in arable
land (13.6% of the world’s total as
compared with 16.0% of the world’s
GDP). This is a surprising result, as we
usually think of the United States as a
major exporter of agricultural
commodities, so according to the
Heckscher–Ohlin theorem, we would
expect it to be land- abundant.
• Another surprising result is that China
was abundant in research and
development (R&D) scientists: it had
19.7% of the world’s R&D scientists, as
compared with 16.2% of the world’s
GDP in 2017. This seems to contradict
the H–O theorem, as China exports
basic rather than research-intensive
goods.
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2) Testing the Heckscher–Ohlin Model
(part 7)
• Evolution of Factor Endowments in China and the United
States
– Leontief found that the United States was exporting labor-intensive
products even though it was capital-abundant at the time.
– One explanation for this outcome would be that labor is highly
productive in the United States and less productive in the rest of the
world.
– If that is the case, then the effective labor force in the United States,
which equals the labor force times it productivity (which measures how
much output the labor force can produce), is much larger than it
appears to be when we just count people.
– If labor is more productive in the United States, then the United States
is abundant in skilled labor (like R&D scientists), and it should be no
surprise that it is exporting labor-intensive products.

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2) Testing the Heckscher–Ohlin Model
(part 8)

• Evolution of Factor Endowments in China and

the United States
– Revisiting How to Measure Factor Abundance
– We define effective factor endowment as the actual
amount of a factor found in a country times its
productivity.
Effective factor endowment =
Actual factor endowment • factor productivity
– The amount of an effective factor found in the world
is obtained by adding up the effective factor
endowments across all countries.

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2) Testing the Heckscher–Ohlin Model
(part 9)

• Evolution of Factor Endowments in China and the

United States
– Revisiting How to Measure Factor Abundance
– To determine whether a country is abundant in a certain
factor, we compare the country’s share of that effective
factor with its share of world GDP.
– If its share of an effective factor exceeds its share of
world GDP, we conclude that the country is abundant in
that effective factor. If its share of an effective factor is
less than its share of world GDP, we conclude the country
is scarce in that effective factor.

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2) Testing the Heckscher–Ohlin Model
(part 10)
• Evolution of Factor Endowments in China and the United
States
– Revisiting How to Measure Factor Abundance
– Effective R&D Scientists: The productivity of an R&D scientist
depends on laboratory equipment, computers, and other types
of material with which the scientist has to work.
Effective R&D scientists =
Actual number of R&D scientists • R&D spending per scientist
– Effective Arable Land: Compares output in each country with
the inputs of labor, capital, and land.
– Effective arable land = Actual arable land • Productivity in
agriculture

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2) Testing the Heckscher–Ohlin Model
(part 11)

• Evolution of Factor Endowments in China and the

United States
FIGURE 4-7 (1 of 2) Actual and Effective Factor Endowments, China, 2000–2017

Shown are the actual endowments in capital, R&D scientists, and arable land
for China, as well as the effective factor endowments in R&D scientists and
arable land for China, in selected years from 2000 to 2017. Also shown is
China’s share of world GDP. China’s share of world capital has more than
doubled, to 20.5% in 2017.
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2) Testing the Heckscher–Ohlin Model
(part 12)

• Evolution of Factor Endowments in China and the

United
FIGURE 4-7 (2 of 2) Actual and Effective Factor Endowments, China, 2000–2017

China’s share of R&D scientists has been about 20% since 2010, but its
effective share of R&D scientists has been at that level only since 2017. So
China’s abundance of R&D scientists is a recent phenomenon.

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2) Testing the Heckscher–Ohlin Model
(part 13)

• Evolution of Factor Endowments in China and the

United
FIGURE 4-8 (1 of 2) Actual and Effective Factor Endowments, United States, 2000–2017

Shown are the actual endowments in capital, R&D scientists, and land, as well as
the effective factor endowments in R&D scientists and land, in selected years from
2000 to 2017. The United States’ share of the world capital endowment has fallen
over time, as other countries, like China, have grown in capital.
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2) Testing the Heckscher–Ohlin Model
(part 14)

• Evolution of Factor Endowments in China and the

United States
FIGURE 4-8 (2 of 2) Actual and Effective Factor Endowments, United States, 2000–2017

The United States’ share of effective arable land has always exceeded its share
of actual arable land. Comparing the United States’ share of effective arable
land with its share of GDP, it has fluctuated between being scarce and
abundant.
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2) Testing the Heckscher–Ohlin Model
(part 15)
• Evolution of Factor Endowments in China and the
United States
TABLE 4-2 U.S. Food Trade, 2000–2017
This table shows that U.S. food trade has fluctuated between positive
and negative net exports since 2000. This is consistent with our finding
that the United States is neither very abundant nor very scarce in
arable land.
U.S. FOOD U.S. FOOD U.S. FOOD U.S. FOOD U.S. FOOD U.S. FOOD U.S. FOOD
TRADE TRADE TRADE TRADE TRADE TRADE TRADE
(BILLIONS (BILLIONS (BILLIONS (BILLIONS (BILLIONS (BILLIONS (BILLIONS
U.S.$): 2000 U.S.$): 2003 U.S.$): 2006 U.S.$): 2009 U.S.$): 2012 U.S.$): 2015 U.S.$): 2017

Exports 47.9 55.0 66.0 93.9 133.0 127.7 132.7

Imports 46.5 56.5 76.1 82.9 111.1 128.8 138.8

Net 1.4 −1.2 −10.1 11.0 21.9 −1.0 −6.1

exports

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2) Testing the Heckscher–Ohlin Model
(part 16)
• Leontief’s Paradox Once Again
– Capital Abundance: It is hard to estimate the U.S. share of capital
stock in the postwar years. But given the devastation of the capital
stock in Europe and Japan due to World War II, we can presume that
the U.S. share of world capital was more than 37%. That estimate
means that the U.S. share of world capital exceeds the U.S. share of
world GDP, so that the U.S. was abundant in capital in 1947.
– Labor Abundance: If we do not correct labor for productivity
differences across countries, then the population of each country is a
rough measure of its labor force. The U.S. share of population for the
sample of 30 countries in 1947 was very small. This estimate of labor
abundance is much less than the U.S. share of GDP, which means the
United States was scarce in labor.

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2) Testing the Heckscher–Ohlin Model
(part 17)
• Leontief’s Paradox Once Again
• Labor Abundance
FIGURE 4-9 Labor Endowment and GDP for the United States and Rest of
World, 1947
Shown here are the share of labor,
“effective” labor, and GDP of the
United States and the rest of the
world in 1947. The United States had
only 8% of the world’s population, as
compared to 37% of the world’s GDP,
so it was very scarce in labor. But
when we measure effective labor by
the total wages paid in each country,
then the United States had 43% of
the world’s effective labor as
compared to 37% of GDP, so it was
abundant in effective labor.

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2) Testing the Heckscher–Ohlin Model
(part 18)
• Leontief’s Paradox Once Again
• Labor Productivity
FIGURE 4-10 Labor Wages and Productivity in 1990

Shown here are estimated wages

and labor productivities across
countries, relative to the United
States.
Notice that labor and wages were
highly correlated across countries:
the points roughly line up along the
45-degree line.

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3) Effects of Trade on Factor Prices
(part 1)
Effect of Trade on the Wage and Rental of Home
Economy-Wide Relative Demand for Labor
FIGURE 4-11 Determination of Home Wage/Rental
The economy-wide relative demand
for labor, RD, is an average of the
LC/KC and LS/KS curves and lies
between these curves.
The relative supply, L/K, is shown by
a vertical line because the total
amount of resources in Home is
fixed.
The equilibrium point A, at which
relative demand RD intersects
relative supply L/K, determines the
wage relative to the rental, W/R.
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3) Effects of Trade on Factor Prices
(part 2)
Effect of Trade on the Wage and Rental of Home
Increase in the Relative Price of Computers
FIGURE 4-12 Increase in the Price of Computers
Initially, Home is at a no-trade
equilibrium at point A with a relative
price of computers of (PC/PS)A.
An increase in the relative price of
computers to the world price, as
illustrated by the steeper world
price line, (PC/PS)W, shifts
production from point A to B.
At point B, there is a higher output
of computers and a lower output of
shoes, QC2 > QC1 and QS2 < QS1.

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3) Effects of Trade on Factor Prices
(part 3)
Effect of Trade on the Wage and Rental of Home
Increase in the Relative Price of Computers
FIGURE 4-13 (1 of 2) Effect of a Higher Relative Price of Computers on
Wage/Rental
An increase in the relative price
of computers shifts the economy-
wide relative demand for labor,
RD1, toward the relative demand
for labor in the computer industry,
LC/KC. The new relative demand
curve, RD2, intersects the relative
supply curve for labor at a lower
relative wage, (W/R)2.

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3) Effects of Trade on Factor Prices
(part 4)
Effect of Trade on the Wage and Rental of Home
Increase in the Relative Price of Computers
FIGURE 4-13 (2 of 2) Effect of a Higher Relative Price of Computers on
Wage/Rental
As a result, the wage relative to
the rental falls from (W/R)1 to
(W/R)2.
The lower relative wage causes
both industries to increase their
labor–capital ratios, as illustrated
by the increase in both LC/KC and
LS/KS at the new relative wage.

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3) Effects of Trade on Factor Prices
(part 5)
Determination of the Real Wage and Real Rental
Change in the Real Rental

𝑅 = 𝑃! $ 𝑀𝑃𝐾! and 𝑅 = 𝑃" $ 𝑀𝑃𝐾"

𝑀𝑃𝐾! = 𝑅/𝑃! ↑ and 𝑀𝑃𝐾# = 𝑅/𝑃" ↑

Change in the Real Wage

𝑊 = 𝑃! $ 𝑀𝑃𝐿! and 𝑊 = 𝑃" $ 𝑀𝑃𝐿"

𝑀𝑃𝐿! = 𝑊/𝑃! ↓ and 𝑀𝑃𝐿# = 𝑊/𝑃" ↓

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3) Effects of Trade on Factor Prices
(part 6)
Determination of the Real Wage and Real Rental
Stolper–Samuelson Theorem
• In the long run, when all factors are mobile, an
increase in the relative price of a good will increase the
real earnings of the factor used intensively in the
production of that good and decrease the real earnings
of the other factor.
• For our example, the Stolper–Samuelson theorem
predicts that when Home opens to trade and faces a
higher relative price of computers, the real rental on
capital in Home rises and the real wage in Home falls.
In Foreign, the changes in real factor prices are just
the reverse.
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SIDE BAR: Does International Trade
Reduce Poverty and Income Inequality?
• In the Heckscher–Ohlin model, the abundant factor gains from trade and
the scarce factor loses from trade.
• In a situation where the abundant factor is low-skilled labor, the
Heckscher–Ohlin model predicts that trade will lead to a rise in wages for
low-skilled labor. If some of these workers were in poverty, a rise in their
wage means a reduction in poverty.
• In addition, the Heckscher–Ohlin model predicts that trade will lead to a fall
in the earnings of high-skilled labor, so income inequality will be reduced.
• A real-world example is China up to 2013, in which low-skilled labor was
the abundant factor. The increase in wages in China for low-skilled workers
reduced the percentage of people living in extreme poverty in China from
84% to 10% by 2010.
• However, income inequality within China has been increasing, which is not
the result expected from the Heckscher–Ohlin model.

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3) Effects of Trade on Factor Prices
(part 7)
Changes in the Real Wage and Rental: A Numerical Example
To illustrate the Stolper–Samuelson theorem, we use a numerical
example to show how much the real wage and rental can change in
response to a change in price.
Computers:
Sales revenue = Pc • Qc = 100
Earnings of labor = W • Lc = 50
Earnings of capital = R • Kc = 50
Shoes:
Sales revenue = Ps • Qs = 100
Earnings of labor = W • Ls = 60
Earnings of capital = R • Ks = 40

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3) Effects of Trade on Factor Prices
(part 8)
Changes in the Real Wage and Rental: A Numerical Example
Notice that shoes are more labor-intensive than computers:
• The share of total revenue paid to labor in shoes is 60/100 =
60%.
• This is more than that share in computers: 50/100 = 50%.
When Home and Foreign undertake trade, the relative price of
computers rises in Home. For simplicity:
Computers: Percentage increase in price = ΔPC/PC = 10%
Shoes: Percentage increase in price = ΔPS /PS = 0%

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3) Effects of Trade on Factor Prices
(part 9)
Changes in the Real Wage and Rental: A Numerical Example
• The rental on capital can be calculated by taking total sales
revenue in each industry, subtracting the payments to labor,
and dividing by the amount of capital.
• This calculation gives us the following formulas for the rental
in each industry:

/! $0! 12$3!
𝑅= , for computers
4!

/" $0" 12$3"

𝑅= 4"
, for shoes

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3) Effects of Trade on Factor Prices
(part 10)

Changes in the Real Wage and Rental: A Numerical

Example
• The price of computers has risen, so Δ PC > 0, holding
fixed the price of shoes, Δ PS = 0.
• We can trace through how this affects the rental by
changing PC and W in the previous two equations:

/! $0! 1∆2$3!
𝑅= , for computers
4!

6$0! 1∆2$3"
𝑅= , for shoes
4"

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3) Effects of Trade on Factor Prices
(part 11)
Changes in the Real Wage and Rental: A Numerical Example
• It is convenient to work with percentage changes in the variables.
We can introduce these terms into the preceding formulas by
rewriting them as:
$% ∆'! '!" (! ∆+ +),!
= − , for computers
% '! %)*! + %)*!

∆% ∆+ +),#
=− , for shoes
% + %)*#

• Plug the above data for shoes and computers into these formulas:
$% -.. ∆0 /.
= 10% $ − , for computers
% /. 0 /.

∆% ∆+ 1.
%
=− + 2.
, for shoes

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3) Effects of Trade on Factor Prices
(part 12)
Changes in the Real Wage and Rental: A Numerical Example
• Subtracting one equation from the other, we get

∆𝑅 100 ∆𝑊 50
= 10% $ − , for computers
𝑅 50 𝑊 50

∆𝑅 ∆𝑊 60
𝑀𝑖𝑛𝑢𝑠: =0 − , for shoes
𝑅 𝑊 40
100 ∆𝑤 20
𝐸𝑞𝑢𝑎𝑙𝑠: 0 = 10% < + 𝑤 40
50

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3) Effects of Trade on Factor Prices
(part 13)
Changes in the Real Wage and Rental: A Numerical Example
∆2 C
• Simplifying the last line, we get 0 = 20% + .
2 D
∆𝑊 −20%
= = −40% , change in wages
𝑊 1
2
• To find the change in the rental paid to capital (ΔR/R), we
can take our solution for ΔW/W = −40% and plug it into the
equation for the change in the rental in the shoes sector.

∆𝑅 ∆𝑊 60 60
𝑅
=−
𝑊 40
= 40% ,
40
= 60% , change in rental

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3) Effects of Trade on Factor Prices
(part 14)
Changes in the Real Wage and Rental: A Numerical Example
General Equation for the Long-Run Change in Factor Prices
The long-run results of a change in factor prices can be summarized in
the following equation:
∆𝑊/𝑊 < 0 < ∆𝑃, /𝑃, < ∆ 𝑅 ⁄𝑅 , for an increase in 𝑃2

$%&' (&)% $%&' -%./&'

*&''+ 0.1-%&+%+

The relationship between the changes in product prices to changes in factor

prices is called the “magnification effect” because it shows how changes in the
prices of goods have a magnified effect on the earnings of factors.
∆𝑅⁄𝑅 < ∆𝑃! / 𝑃! < 0 < ∆ 𝑊 ⁄𝑊 , for a decrease in 𝑃! ∆𝑅⁄𝑅 < 0 < ∆ 𝑃* ⁄𝑃* < ∆ 𝑊 ⁄𝑊 , for an increase in 𝑃*

#$%& ,%-$ !"#$ %"&'#$ !"#$ +#,"

#$%& '$()%& (#$$)
*%&&+ .(/'$%+$+ -&.%"#)")

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Conclusions (part 1)

• The Heckscher–Ohlin model isolates the effect of different factor

endowments across countries and determines the impact of these
differences on trade patterns, relative prices of goods between
countries, and factor returns.
• The Heckscher‒Ohlin model predicts that countries export goods
that use their abundant factor intensively.
• Leontief paradoxically found that the exports from the United States
were relatively labor-intensive. This paradox was explained with
later research showing that the United States was abundant in
effective labor, as measured by productivity, in 1947.
• Adjusting factors of production for their productivity also explains
the changing abundancy and scarcity of arable land in the United
States and of R&D scientists in China.

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Conclusions (part 2)

• When firms have differentiated products and increasing returns to

scale, the potential exists for gains from trade above and beyond
those under perfect competition.
• By focusing on the factor intensities among goods (i.e., the relative
amount of labor and capital used in production), the
Heckscher‒Ohlin (HO) model also explains who gains and who
loses from the opening of trade.
• The HO model predicts real gains for the factor used intensively in
the export good, whose relative price goes up with the opening of
trade, and real losses for the other factor.
• Having just two factors, both of which are fully mobile between the
industries, leads to a clear prediction about who gains and who
loses from trade in the long run.

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KEY POINTS (part 1)

1. In the Heckscher–Ohlin model, we assume that

the technologies are the same across countries
and that countries trade because the available
resources (labor, capital, and land) differ across
countries.

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KEY POINTS (part 2)

2. Unlike the short-run specific-factors model, in

which capital and land resources cannot move
between industries, the Heckscher–Ohlin
model is a long-run framework that assumes
that labor, capital, and other resources can
move freely between the industries.

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KEY POINTS (part 3)

3. With two goods, two factors, and two countries,

the Heckscher–Ohlin model predicts that a
country will export the good that uses its
abundant factor intensively and import the other
good.

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KEY POINTS (part 4)

4. The first test of the Heckscher–Ohlin model

was made by Leontief using U.S. data for 1947.
He found that U.S. exports were less capital-
intensive and more labor-intensive than U.S.
imports. This was a paradoxical finding
because the United States was abundant in
capital.

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KEY POINTS (part 5)

5. The assumption of identical technologies used in the

Heckscher–Ohlin model does not hold in practice.
Current research has extended the empirical tests of
the Heckscher–Ohlin model to allow for many factors
and countries, along with differing productivities of
factors across countries. When we allow for different
productivities of labor in 1947, we find that the United
States is abundant in effective—or skilled—labor, which
explains the Leontief paradox.

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KEY POINTS (part 6)

6. According to the Stolper–Samuelson theorem, an

increase in the relative price of a good will cause
the real earnings of labor and capital to move in
opposite directions: the factor used intensively in
the industry whose relative price goes up will find
its earnings increased, and the real earnings of the
other factor will fall.

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KEY POINTS (part 7)

7. Putting together the Heckscher–Ohlin theorem and

the Stolper–Samuelson theorem, we conclude that
a country’s abundant factor gains from the opening
of trade (because the relative price of exports goes
up), and its scarce factor loses from the opening of
trade.

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KEY TERMS

Heckscher–Ohlin model abundant in that abundant in that

reversal of factor factor effective factor
intensities scarce in that factor scarce in that
free-trade equilibrium effective labor force effective factor
Heckscher–Ohlin effective factor Stolper–Samuelson
theorem endowment theorem
Leontief’s paradox

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Clicker Question 1. Which of the following is an
assumption of the Heckscher‒Ohlin model?

a. Both factors can move freely between the

industries.
b. The final outputs are subject to trade
restrictions.
c. Consumer tastes are different in each country.
d. The technologies used to produce the two
goods are different in each country.

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Clicker Question 1. Which of the following is an
assumption of the Heckscher‒Ohlin model?
(ANSWER)

a. Both factors can move freely between the

industries. (correct answer)
b. The final outputs are subject to trade
restrictions.
c. Consumer tastes are different in each country.
d. The technologies used to produce the two
goods are different in each country.

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Clicker Question 2. According to the
Heckscher‒Ohlin model, a country will export the
good that:

a. uses its scarce factor intensively.

b. uses both factors equally.
c. uses its abundant factor intensively.
d. none of the above.

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Clicker Question 2. According to the
Heckscher‒Ohlin model, a country will export the
good that: (ANSWER)

a. uses its scarce factor intensively.

b. uses both factors equally.
c. uses its abundant factor intensively.
(correct answer)
d. none of the above.

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Clicker Question 3. The Stolper‒Samuelson theorem
predicts that an increase in the relative price of a good will
result in an increase in the earnings of:

a. the factor used intensively in that industry.

b. the factor used abundantly in that industry.
c. both factors.
d. neither factor.

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Clicker Question 3. The Stolper‒Samuelson theorem
predicts that an increase in the relative price of a good will
result in an increase in the earnings of: (ANSWER)

a. the factor used intensively in that industry.

(correct answer)
b. the factor used abundantly in that industry.
c. both factors.
d. neither factor.

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Clicker Question 4. The Leonief paradox is
explained by:

a. the fact that technologies are not identical.

b. differing factor productivities.
c. a unique world situation following WWII.
d. all of the above.

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Clicker Question 4. The Leonief paradox is
explained by: (ANSWER)

a. the fact that technologies are not identical.

b. differing factor productivities.
c. a unique world situation following WWII.
d. all of the above. (correct answer)

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Clicker Question 5. According to the
Heckscher‒Ohlin model, which factor of production
gains from trade?

a. The factor used intensively in the import good

b. The factor used intensively in the export good
c. Both factors gain from trade.
d. No factor gains from trade.

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Clicker Question 5. According to the
Heckscher‒Ohlin model, which factor of production
gains from trade? (ANSWER)

a. The factor used intensively in the import good

b. The factor used intensively in the export
good (correct answer)
c. Both factors gain from trade.
d. No factor gains from trade.

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Discovering Data

In this chapter we examined the Heckscher‒Ohlin model, which

suggests that relative factor abundancies can predict trade patterns.
Using the data for the United States at the Observatory of Economic
Complexity located at: https://oec.world/en/profile/country/usa/

a. Scroll down to Product Exports. Which are the top three (3)
destination countries for U.S. product exports?

b. For each country, identify what the top three (3) product exports from
the United States are. Are these exports from the United States what
you would expect using the Heckscher‒Ohlin model? Why or why
not?

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